By David Harding, Karen Harris, Richard Jackson
and Satish Shankar
The renaissance in mergers and acquisitions: What to do with all that cash?
Copyright © 2013 Bain & Company, Inc. All rights reserved.
Preface
Deal making has always been cyclical, and the last few years have felt like another low point in the cycle. But the historical success of M&A as a growth strategy comes into sharp relief when you look at the data. Bain & Company’s analysis strongly suggests that executives will need to focus even more on inorganic growth to meet the expectations of their investors.
In the fi rst installment of this three-part series on the coming M&A renaissance, “The surprising lessons of the 2000s,” we looked back at the last 11 years of deal activity and examined why it was a very good time for deal makers who followed a repeatable model for acquisitions. The accepted wisdom paints the decade as a period of irrational excess ending in a big crash. Yet companies that were disciplined acquirers came out the biggest winners. Another surprise: Materiality matters. We found the best returns among those companies that invested a signifi cant portion of their market cap in inorganic growth.
In this second part in our series—“What to do with all that cash?”—we look forward. We argue that the confl uence of strong corporate balance sheets, a bountiful capital environment, low interest rates and eight great macro trends will combine to make M&A a powerful vehicle for achieving a company’s strategic imperatives. The fuel—abundant capital—will be there to support M&A, and the pressure on executives to fi nd growth will only increase as investors constantly search for higher returns. Some business leaders argue that organic growth is always better than buying growth, but the track record of the 2000s should make executives question this conventional view.
The fi nal part of the series highlights the importance of discipline in a favorable environment for M&A. Deal making is not for everyone. If your core business is weak, the odds that a deal will save your company are slim. But if you have a robust core business, you may be well positioned. All successful M&A starts with great corporate strategy, and M&A is often a means to realize that strategy. Under pressure to grow, many companies will fi nd inorganic growth faster, safer and more reliable than organic investments.
As M&A comes back, some executives will no doubt sit on the sidelines thinking it is safer not to play. Experience suggests that their performance will suffer accordingly. The winners will be those who get in the game—and learn how to play it well.
The renaissance in mergers and acquisitions: What to do with all that cash?
1
The world is awash in capital. By Bain’s estimate, about
$300 trillion in global fi nancial holdings is available for
investment. The time is right to put this money to work,
and a lot of it should fund the renaissance in M&A.
Why? One reason is pent-up demand. The slowdown
in M&A since 2007 was triggered by the fi nancial crisis,
and will reverse itself as the world economy recovers.
Each M&A boom tends to outstrip the previous one—
both in the number of deals and in the total value of
acquisitions (see Figure 1).
This time around, however, three additional factors will
turbocharge the deal-making renaissance:
• Financial capital is plentiful and cheap, and will
likely remain so. With real interest rates well below
historical levels, the pursuit of higher returns will
be unrelenting.
• A series of trillion-dollar trends are opening up
major new opportunities for growth.
• Many companies are fl ush with cash and well po-
sitioned to capitalize on these opportunities—but
organic growth alone is unlikely to produce the
returns investors expect.
Together, these factors are likely to push deal making
to record levels. Let’s look more closely at the eco-
nomic environment and the reasons for our belief in
an M&A renaissance.
A world awash in capital
Capital is no longer scarce; it’s superabundant. The $300
trillion in fi nancial holdings is about six times larger
than the market value of all publicly traded companies
in the world. By the end of the decade, capital held by
financial institutions will increase by approximately
Figure 1: The global M&A market is cyclical
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: Thomson Financial (until 2000); Dealogic (from 2000)
Global announced M&A deal value
Recession:1980Q1–1980Q21981Q2–1982Q3
Recession:1990Q3–1991Q1
Recession:2001Q1–2001Q3
Recession:2007Q4–2009Q4
0
1
2
3
4
$5T
0
10
20
30
40
50K
Global deal count
Deal value ($T) Deal count (k)
2
The renaissance in mergers and acquisitions: What to do with all that cash?
European Central Bank and the Bank of Japan are
pursuing similar policies. Central banks are not
only setting their own rates low; they are also
helping to keep market rates down by pumping
money into their economies.
• Despite all this money—and contrary to much
conventional wisdom—inflationary pressures
around the world are likely to remain weak. The
reason is that today’s economy is constrained by
the slow pace of growth in demand, not by supply.
From 1973 to 1981, the most recent period of sus-
tained high infl ation, supply constraints in energy
and other sectors combined with buoyant demand
from the young baby boomer generation led to
continuing upward pressure on prices. In the 2010s,
supply growth in most sectors is readily available;
many industries have signifi cant overcapacity. Yet
demand is tepid and is likely to remain so for
decades, partly because of long-term trends such
as the aging of the population. Given these two
factors, producers will fi nd it diffi cult to pass price
increases on to consumers.
Although abundant capital and easy borrowing will
probably not feed general inflation, they are almost
certain to have one kind of inflationary effect: They
will feed the growth of asset bubbles. In a global econ-
omy, some assets somewhere are likely to be increasing
in price at any given time; it might be metals, agricul-
tural commodities, fuels, farmland, other real estate
or indeed nearly any other class of assets. As investors
around the world pour their money into these assets
their prices rise still higher, and the stage is set for a
classic bubble. In the environment we have described,
the bubbles will likely last longer and grow bigger
before they inevitably burst.
$100 trillion (measured in 2010 prices and exchange
rates)—an amount more than six times the US GDP.
All that money needs to be put to work.
Capital is widely available at relatively low cost. The job is to put all this money to work with the goal of creating alpha—performance that outstrips market indexes.
Capital superabundance produces low interest rates. In
the years following the global fi nancial crisis, interest
rates in many countries hit new lows, with real rates
on low-risk investments hovering around zero. We
expect rates to remain low for some time, primarily
because of supply and demand: Financial assets have
grown considerably faster than real output between
the early 1990s and today, a trend that has led to a drop
of 4 to 5 percentage points in the global average lending
rate during this period. Three interrelated factors
reinforce that long-term trend:
• Historically, rates remain low after a crisis of the
sort that began in 2007. Households and businesses
reduce their borrowing. Growth is sluggish. These
long-cycle periods of unusually low interest rates
can extend for decades. In the Great Depression
and more recently in Japan’s Lost Decade, rates re-
mained low for up to 20 years after the initial crisis.
• Central banks around the world are committed to
keeping interest rates low for the foreseeable future.
The US Federal Reserve Board has said that it will
maintain low rates as long as unemployment stays
above 6.5% and infl ation remains below 2.5%. The
The renaissance in mergers and acquisitions: What to do with all that cash?
3
Companies with investment-grade ratings often fi nd
that they can borrow at a lower cost than many sovereign
nations, whose bonds were once thought to be nearly
risk-free. Companies in zones with highly valued
currencies—Europe, for instance—can take advantage
of their currency’s strength to invest overseas at bargain
rates. The job is to put all this money to work with the
goal of creating alpha—performance that outstrips
market indexes. By the same token, sitting on cash can
be a high-risk strategy when rivals are repositioning
themselves for growth.
Hurdle rates for corporate investments symbolize this
challenge. In our experience, many chief fi nancial offi -
cers (CFOs) have kept hurdle rates high relative to interest
rates in the post-crisis years, explaining that their caution
refl ects the general risks of an uncertain world and the
specifi c risk that interest rates would return to historically
normal levels. But lowering hurdle rates may actually
High investor expectations
Capital is superabundant, interest rates are correspond-
ingly low, demand is muted and growth sluggish. Does
all this mean that investors expect only modest returns?
Not quite. The data indicates that investors expect
companies to grow considerably faster than their his-
torical growth rates. In the US, where this growth gap is
most pronounced, companies increased their earnings
at an average annual rate of 6% in the period from
1995 through 2011 (see Figure 2). Yearly growth in
nominal GDP during the period 2012 to 2014 is likely
to be much the same as it was then—but investors
expect their companies to grow at about 12% a year.
Executives thus fi nd themselves in a challenging situ-
ation. Capital is widely available at relatively low cost,
including on their own companies’ balance sheets.
Figure 2: The challenge: Investors expect companies to grow faster than the historical growth embedded in their business
1995–2011
Note: Based on respective aggregate EPS consensus forecasts for S&P 500 (US), MSCI Europe (Europe) and FTSE Pacific (APAC)Sources: Thomson Financial I/B/E/S; Bain analysis
Growth expectations > historical performance
Earnings growth
0
5
10
15
20
25%US
6%
Historicalearnings
12.2%
Forecastedearnings
2012–2014
Europe
6.4%
Historicalearnings
10.1%
Forecastedearnings
Asia-Pacific
7.4%
Historicalearnings
13%
Forecastedearnings
4
The renaissance in mergers and acquisitions: What to do with all that cash?
nological innovations such as tablet computers will
come “soft” innovations, such as the ability to deliver
a new outfi t to an online shopper’s doorstep the same
day she orders it. Soft innovations enhance and stimu-
late consumption by providing extra value that buyers
are willing to pay for. They are likely to transform
whole categories of consumer goods and services,
from fashion to food.
Government and infrastructure. In developed nations,
old infrastructure, new investments will translate into a
surge of spending by governments on replacements
and upgrades of physical infrastructure. With public
funds limited, some of these jobs will be undertaken
by public-private partnerships, and are likely to con-
tribute about $1 trillion to world GDP. Meanwhile,
militarization following industrialization—arms buildup
in the developing world—presents an opportunity for
arms developers but, more important, a risk to global
business. China has an overarching interest in protect-
ing its supply chain, but the supply chains are shared
by Japan and (to some extent) by India. The risk of an
attenuated supply chain, in turn, puts a premium on
building capacity closer to end markets, which leads
many companies to consider moving operations back
to the US and Europe.
Developing nations face the challenge of developing
human capital, and their social infrastructure is likely
to require even more investment than their physical
infrastructure. The combination of broadening access
to education, building effective healthcare delivery
systems and strengthening the social safety net will
add as much as $2 trillion to world GDP. Additionally,
rapid growth in these emerging markets has created a
global shortage of management talent that is only going
to get worse. In developed nations, meanwhile, new
healthcare spending—keeping the wealthy healthy—will
likely add $4 trillion to GDP.
be a more appropriate move for an era of capital super-
abundance. Lowering them too far is always a danger, but
so is leaving them high. A company with high hurdle
rates may wind up perpetually meeting its earnings
targets while curtailing investment and sacrifi cing top-
line growth—not a formula for making shareholders
happy over the long term. CFOs face a further challenge
as well. Though they are punished by the market for
failing to protect against risk, they aren’t rewarded for
using the balance sheet strategically to strengthen the
business—particularly since such an approach wasn’t
necessary prior to the global fi nancial crisis.
Macro trends—and the opportunitiesfor growth
Against the backdrop of this business climate, we see
eight macro trends in the global economy that open
up major new growth opportunities (see Figure 3). We
won’t discuss them in detail here—for a full account, see
our report, “The great eight: Trillion-dollar growth trends
to 2020.” This brief summary, with the “great eight”
shown in italics, indicates the potential for growth.
Consumers. By 2020, the next billion consumers in devel-
oping nations will join the ranks of the global middle
class, earning more than $5,000 a year. Their purchasing
power and preferences will be different from those of
middle-class consumers in developed nations, but taken
as a group they will add an additional $10 trillion to
world GDP by 2020. Companies targeting this group
need lower cost structures than in use today—and
they can’t assume these consumers will move up the
price ladder over time.
Consumers in developed countries will be looking for
more of what they have enjoyed in the recent past—
everything the same but nicer, better and more carefully
tailored to their tastes and lifestyles. Along with tech-
The renaissance in mergers and acquisitions: What to do with all that cash?
5
Why M&A?
For leadership teams, one vital challenge is how to
best position their businesses to take advantage of
these emerging trends. A strategy focused on organic
growth alone is unlikely to deliver the expanded capa-
bilities or market penetration they need. Most companies
will have to rely on a balanced strategy, pursuing M&A as
well. In many cases it is faster and safer to buy an asset
than to invest in building your own (see Figure 4).
Three essential questions can help companies determine
when buying rather than building makes sense for them:
• Does someone else have a capability that would
enhance your business? There are many different
kinds of capabilities—technologies, sales channels,
operations in particular geographic areas and so
forth. If no one else has the capabilities you need
The next big thing—and the resources to support all
of these trends. Major innovations come in waves,
and fi ve potential platform technologies—nanotech-
nology, genomics, artifi cial intelligence, robotics and
ubiquitous connectivity—show promise of fl owering
over the next decade. New technologies tend to rein-
force one another. Prepping for the next big thing should
open up unexpected opportunities in both consumer
goods and industrial processes. When the next big
things arrive, they are likely to accelerate growth.
All of these trends require growing output of primary
inputs, meaning large investments in basic resources
such as food, water, energy and ores. Growing demand
will stimulate new investment, but will also lead to
spot shortages and price volatility. All told, the primary
goods sector will likely add $3 trillion to global GDP.
Figure 3: We estimate that each of the eight macro trends will increase global GDP by at least $1 trillion, but just two account for half the expected growth
Note: All numbers rounded up to the nearest $1T
1 2 3 4 5 6 7 8 Total
Advancedeconomiesadjustingto age
Developingeconomiescatching up
Estimated contribution of the Great Eight macro trends to increasereal (run rate) global GDP between 2010 and 2020 (forecast)
Nextbillion
consumers
Develophumancapital
Militaritizationfollowing
industrialization
Growing output ofprimaryinputs
Keepingthe wealthy
healthy
Old infra�structure, newinvestments
Everythingthe same,but nicer
Prepping forthe nextbig thing
0
10
20
$30T
10.01.0
1.0
3.02.0
4.0
5.01.0
$11T
$16T
27.0
6
The renaissance in mergers and acquisitions: What to do with all that cash?
plant and existing business was better than starting
from scratch in a notoriously diffi cult market for
launching a business.
• Do you have a “parenting advantage” in managing
the capability? Capabilities don’t exist in a vacuum;
they exist in organizations. If your organization is
better than anybody else at managing a particular
capability—perhaps because of your experience
with similar ones—you have a built-in advantage
over other potential acquirers. Nestlé, the global
leader in infant nutrition, was probably the best
possible corporate parent to buy Pfizer’s largely
orphaned baby formula business.
Of course, this analysis raises an obvious question. If
the environment for M&A is already favorable, why
has the pace of deal making been so slow during the
recovery from the fi nancial crisis? The chief reason in
to strengthen or adapt your business, you obviously
have to grow them yourself. If the capabilities are
available, they may be candidates for acquisition.
When Comcast, the American cable TV giant,
concluded that it needed content to feed its cable
franchises, it bought NBC/Universal and the
libraries, production and news infrastructure that
came with it.
• Is the risk-adjusted rate of return higher if you
buy the capability than if you build it internally?
Every acquisition carries risks, but every investment
in organic growth also carries risks. The challenge
for companies’ fi nancial teams is to create apples-
to-apples comparisons for expected returns on
investments in organic vs. inorganic growth, fac-
toring in the risks on both sides as accurately as
possible. When Italian tire maker Pirelli wanted to
enter Russia, it concluded that buying a “brownfi eld”
Figure 4: Buy vs. build: Standing pat is not an option
Source: Bain & Company
Most companies likely to pursue a balanced strategy
Three acid questions
Does someone else have a capability that would
enhance your business?
Is the ROI higher to buy it than to
develop it internally?
Can you articulate a parenting advantage?
The renaissance in mergers and acquisitions: What to do with all that cash?
7
have to steer clear rather than trying to fi ght or ride
the deadly tide.
Bubble detection capabilities are important for every
company, not just financial intermediaries and
investors. The key is to separate out the factors that
drive long-term, sustainable growth from specula-
tive shorter-term infl uences. To do so, executives
need deep knowledge of a business’s fundamentals
and its interaction with the broader environment.
In the recent US housing bubble, for instance,
homebuilders could have examined the demo-
graphics of the population and trends in income
growth. The widening gulf between income and
population growth (on the one hand) and the
market value of housing (on the other) was a clear
signal of an emerging bubble. The bigger, broader
and longer-lasting bubbles produced by abundant
capital may lead companies to assume that a two-
year or even three-year trend is real and permanent.
Businesses may then deploy real resources only
to have the bottom fall out before they can grace-
fully exit their position. The effects can quickly
become catastrophic.
2. Currency volatility. Currency is one of the largest
traded commodities in the world. It is subject
both to massive intervention by governments and
to long-term structural forces that alter its value
relative to other currencies and to underlying
baskets of goods and services. Every company’s
deal modeling should reflect both upside and
downside currency scenarios.
3. Captured cash. Though the world is awash in
capital, a large fraction may not be accessible to
home-market companies because of tax policies
and currency controls. This can lead to the odd
phenomenon of companies with signifi cant cash
our view is that sellers are holding back. Potential
divestors expect business valuations to increase, and
so are inclined to hold on to their assets for the time
being. But this is likely to change quickly, once sellers
come to see their assets as fully valued or once they
realize that they will be rewarded for prudent divesti-
tures. When a company is planning divestitures, attempts
to time the market should take a back seat to a rigorous
assessment of strategy and the highest-yielding invest-
ment priorities, a topic we examine more fully in our
article “How the best divest,” published by Harvard
Business Review in 2008.
Bubble detection capabilities areimportant for every company, not just fi nancial intermediaries and investors.
The risks
While the environment for M&A will be generally
favorable, would-be acquirers have to watch for a number
of macroeconomic risks and manage them accordingly.
Five are likely to be signifi cant:
1. The prevalence of asset bubbles. As we suggested
earlier, the number, size and duration of asset
bubbles are all likely to increase. Asset bubbles
carry three unmistakable signs: a kernel of real
opportunity followed by a rapid run-up in prices,
valuations unsupported by underlying cash fl ows
and plenty of explanations that purport to show
why “things are different this time.” Part of the
discipline of any kind of investing is recognizing
the warning signs of a bubble. Like avoiding a rip
current by swimming parallel to shore, investors
8
The renaissance in mergers and acquisitions: What to do with all that cash?
5. Increased supply chain risk. The world has grown
comfortable—possibly too comfortable—with the
decades-long trend toward ever-longer supply chains.
In the coming years, a variety of forces may com-
bine to reverse the trend. On the macroeconomic
front, productivity is increasing and the labor-cost
gap between developed and developing nations is
shrinking. On the microeconomic side, companies
are beginning to realize better returns from locating
production closer to consumer markets. Add in the
increased militarization of some Asian nations,
and you have several forces that may send the supply
chain trend in the opposite direction. The risk for
would-be acquirers, of course, is buying production
assets in faraway places just as the world is moving
in the opposite direction.
While M&A is a good strategy for most companies,
it is not easy or simple. The companies best positioned
to work through the issues described above in a disci-
plined manner are those with deep experience in M&A.
In Part III of this series, we return to our theme of the
virtues of a repeatable M&A model for success, which
we will lay out in further detail.
David Harding is a partner with Bain & Company in Boston and co-leader of Bain’s Global M&A practice.
Karen Harris is director of the Bain Macro Trends Group and is based in New York. Richard Jackson is a partner
in London and leader of Bain’s M&A practice in EMEA. Satish Shankar is a Bain partner in Singapore and leader
of the fi rm’s Asia-Pacifi c M&A practice.
on the balance sheet needing to borrow to complete
transactions or even to pay dividends. JPMorgan
Chase, which studied 600 US companies that
break out how much cash they hold overseas,
notes that foreign holdings represent about 60%
of these companies’ cash, much of it in US dollars.
Some companies have resorted to setting up listed
overseas affi liates to better use the captured cash
and tap into local liquidity. According to the same
bank, 50% of recent listings in Hong Kong have
been by overseas companies.
4. China as an exporter of capital. The Chinese gov-
ernment has deliberately pursued policies that
keep domestic consumption relatively low and
investment levels high. Because of these policies,
China will likely have excess capital for both domes-
tic and international investment; indeed, Bain’s
Macro Trends Group expects it to contribute an
estimated $87 trillion to the growth in financial
assets by 2020, more than any other single country.
This will put upward pressure on domestic Chinese
assets available for sale to foreign investors. It may
also contribute to a variety of asset bubbles.
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